2015 outlook: Sunny with a chance of recession

Staff | December 11, 2014

Diverging global monetary policy will have an impact on every asset class, but poses interesting and diverse opportunities for proactive investors, says the global market outlook from State Street Global Advisors (SSgA).

“Looking specifically at growth, we expect the U.S. economy will likely accelerate to 3%,” says Rick Lacaille, global chief investment officer at SSgA. “The eurozone should also grow, although only slightly faster than in 2014. In emerging markets the biggest influence, China, should grow by about 7%, while those countries that pursue reform agendas offer the best potential.”

Riskier assets
Improving economic and earnings environments bring opportunities, even in expensive markets. While the U.S. appears fully valued, short-term momentum continues to favour dollar assets, and even modest earnings increases will be supportive to U.S. equity prices. At current valuations, European and Asian markets offer an attractive entry point for long-term investors looking for greater upside potential.

Reform in emerging markets
A hot topic for the emerging market economies in 2015 is reform. Emerging markets rallied in part on the possibility of reform during elections across India, Indonesia and Brazil in 2014 and further support for reformers is expected going forward.

Fixed income and currency
SSgA expects the U.S. and the U.K. to begin tightening fiscal policy next year, while the European Central Bank, China and Japan continue to stimulate growth.

Investors can expect the U.S. yield curve to flatten further as a rise in short-term rates is offset by overseas demand for longer-dated Treasuries.

Recession?
The International Monetary Fund downgraded the prospects for Germany, France and Italy in 2015 and doubled the probability to 38% that the eurozone will re-enter a recession within the next six months.

European countries that have reformed in recent years can be an opportunity for investors looking for dividend yield and to profit from currency movements.

Despite 2014 being marked as the year of recovery, very few countries witnessed this, with the exception of the U.S., which demonstrated a resilience to market conditions and rising geopolitical tension, Lacaille explains.

“Nonetheless, investors must be mindful of increased volatility in equity markets as a result of divergent global monetary policies,” he adds. “An intelligent assessment of the divergent environment and its risks and opportunities will reward the astute investor in 2015.”